With all due respect, I don't see that on the back of the 1099-R. What I see is a reference to the instructions for Form 5329.

Now that I'm home I've been able to track down the problem. It's the wording of the instructions for the 5329.

I checked both my 1099-R and the official IRS one. Both say that code 2 means "Early distribution, exception applies (under 59 1/2)." As you noted, there's no mention of the 5329, but there's a general instruction for Box 7 to see the 5329 (and 8606) instructions for further information.

The 5329 instructions have conflicting bullets in the "Who Must File?" section. One is the bullet you mentioned, which says that a 5329 is required if you got an early distribution and box 7 didn't have code 1. The next two bullets are in direct contradiction, saying that if a penalty exception applies and the code is not 1 you don't need to file the 5329. I can't imagine how you got confused.

Here's the "trust me, this is how it works" explanation. A code 1 on box 7 means you took a premature distribution subject to the 10% penalty. Code 2 means you took a premature distribution not subject to the penalty. If the box 7 code is correct, no 5329 is required. When you e-file the software will correctly include the penalty for code 1 and exclude the penalty for code 2. Since I retired early my 1099-R for years had code 2 until I reached normal retirement age. IIRC software warned me to make sure I met the exception, but processed everything correctly. I've never filed a 5329 and never had an inquiry from IRS.

Assuming you meet a penalty exception, you don't need to file a 5329 with your return. If you want to file one anyway, that form can be filed by itself. Just download the form, fill it in, correctly please, and send it on its own.